Some of London's leading figures gathered earlier this month to hear three of commercial law's leading figures discuss the state of the legal profession at a Legal Week event.
Outgoing law firm chiefs Tony Angel and Guy Beringer joined UBS general counsel Peter Kurer on the panel of the "Legal Week Evening With ..." The inaugural event, which was held at London's Mayfair Hotel, was chaired by high-profile legal IT consultant Richard Susskind.
With panelists discussing everything from outsourcing to management strategy, the most controversial debate of the evening was sparked by Kurer, who took an uncompromising line on law firm fees. He told the audience he believed that not only could U.K. law firms' impressive increases in profitability be attributed almost solely to firms hiking their hourly rates but that in terms of efficiency they were "dysfunctional" and responsible for "bottlenecks".
It is this frustration with service that has prompted Kurer to oversee an innovative review of UBS' legal advisers, which will culminate in all of the firms being ranked in a league table.
As reported in the last issue of Legal Week, the bank's advisory firms will be judged across seven different areas, including quality and cost, with the results used to select who wins future work.
Kurer's comments provoked debate both among the panel and the audience, which included Lovells senior partner John Young, Jones Day London chief Russell Carmedy, Travers Smith managing partner Chris Carroll, SJ Berwin managing partner Ralph Cohen and Simmons & Simmons head Mark Dawkins.
COSTS VS. EFFICIENCY
"Profits per equity partner (PEP) go up year-by-year but not because firms are improving leverage, increasing hours or cutting costs. It is because the firms have been able to increase their hourly rates every year," Kurer told the audience. "We now pay more to lawyers than to accountants, management consultants, PRs or anyone else -- and it is difficult to control because we use so many."
That the bank is shelling out more fees on outside lawyers than on any other advisers came as a surprise to some in the audience -- though perhaps not to Kurer's fellow panellists, who have each presided over significant growth in both turnover and profitability during their terms heading leading London law firms.
Unsurprisingly, the pair were keen to refute claims of inefficiency, arguing that all U.K. law firms have made significant improvements in recent years. While they conceded they were still "prisoners of the hourly rate", Angel and Beringer argued that efficiency had improved dramatically and was a substantial driver of profitability increases.
Angel argued that U.K. law firms have now improved so much that they have caught up with their U.S. rivals and are now better positioned for the future than their opposite numbers across the pond.
"Profitability has been driven upwards by greater utilisation and because bills have got firmer," said Beringer. "If it is due just to contracting the equity, we have squeezed that lemon dry."
Angel continued: "In the U.K. we have got much better at utilisation and leverage and we are closer to the U.S. model than before. In contrast, they cannot change their leverage or get more from their clients."
If Kurer had hoped to worry his companions with his complaints about soaring hourly costs for legal advice and his desire to get the "best value for the buck", he was to be disappointed.
Angel stated that, for Linklaters at least, while creating value for clients was of paramount importance to the firm, having the lowest rate was not. Hence the firm had positioned itself to handle top-end work for clients.
"We want to show ourselves to be adding value -- there is a drive to show the firm is efficient but it means trying to show that the work you have done brings extra value, even if we are more expensive per hour," he said.
On the back of a record year across London, which saw average PEP at six top 50 U.K. law firms break £1m, profitability was inevitably a hot topic on the night.
While many would argue that a focus on raising PEP has been very much at the top of most firms' priorities in recent years, Angel and Beringer were adamant that the bottom line is not the bottom line in terms of what motivates partners in leading law firms.
Nevertheless, Beringer repeated his call for law firms to focus more on longer-term goals rather than a short-term emphasis on profitability.
"To be a sustainable business we need to meet short-term and long-term goals," he said. "It is not the case that PEP does not matter, but you cannot just think for the short term. In the U.S. you see ever-increasing PEP but a shrinking equity partnership and that tells us nothing about the underlying business."
Taking up the baton, Angel went on: "You cannot start with PEP. You have to aim for the right kind of work and clients and then the PEP comes out of that. It should not be the sole judge. Not making investment in the hope of short-term increases in PEP is very dangerous."
Instead, Beringer and Angel argued that with lawyers less motivated by money than some other professions, the emphasis should be on the process -- winning the right work and keeping lawyers motivated in this way -- with PEP essentially a by-product of business model and culture.
A NEW BENCHMARK
Whatever their arguments, all three conceded that keeping profits high is still a requirement if firms want to keep the right people; even Kurer saw the need for firms to do this.
However, if firms are keen to be judged on something more sophisticated than mere profitability, they need something else to measure up to. While UBS is hoping its new ranking system will give it a broader view of how well advisers are performing, internally it appears to be more of a challenge. Beringer admitted it is hard to judge firms on something other than profits, while Linklaters has introduced a balance scorecard -- looking at everything from people and attrition rates to how the amount of work coming from overseas offices is increasing -- as a means of charting its progress.
LOOKING FORWARD AND LIFE AFTER LAW
With both Beringer and Angel set to leave the legal profession, the audience was keen to hear their predictions for the future.
After all, with equity trimmed heavily in recent years, how will law firms keep increases in profitability and efficiency going ever-upwards, particularly with the effects of the credit squeeze and slowing deal market kicking in?
Following years of pruning of the equity by top firms, Beringer admitted to the audience that profitability figures had probably been manipulated as far they could be.
He said: "PEP has been driven by greater utilization and financial engineering. We have pushed those as far as we can now. Now there could be more collaboration with others and better use of technology outsourcing. We need to be able to invest in them -- and that should make firms more profitable."
Questions from the floor included how the panelists viewed technology as helping law firms achieve greater efficiency and whether outsourcing would increase.
Like Beringer, Angel thought technology would play a big role, with better communication, more integrated systems, precedents and knowledge management all leading to greater efficiency -- crucially, without needing to resort to outsourcing legal services.
Firms will also continue to move towards greater specialization, with Kurer arguing that the international market will divide into three parts, with the global top-end firms on one level, the commoditised global players such as Baker & McKenzie in the second tier and smaller firms focusing on distinct specialisms underneath.
Gone too will be the idea that partnership in a law firm is a career for life. Firms need to do more to make law an attractive career path for graduates, given how competitive the recruitment market is, and to ensure that good training is provided at the firm -- wherever the recruits end up in later life.
Referring to the growing trend for people having more than one career in their working lives, Angel said: "We need to keep developing people to the highest point then, when they cannot go any further within the firm, it is time for people to move on. Even with partnership it will be more of a portfolio career, with people becoming partners for five or seven years and then moving on to something else."
It is not just partners who will see their careers changing; management will also face changes. Responding to a question from the floor about whether firms were likely to bring in external managers, Angel and Beringer admitted that while credibility would be an issue in the short term, it could happen.
Beringer commented: "In 1995 it was radical to have external people brought in for human resources or finance roles -- now they could be partner-equivalent. In 10 years it may not be unusual to have an outside chief executive officer."
Other topics discussed by the panel included management style and the importance of getting partner buy-in; the need for pro-active management and delegation of responsibilities to other partners; and taking the time to think properly about management issues.
However, despite both Beringer and Angel being set to leave their respective firms soon, the one question that most people would have liked to have had answered -- what will they do next? -- was unsurprisingly left hanging.
The only clue was perhaps Angel's suggestion that lawyers would be welcome in outside management roles -- as long as they could demonstrate their ability to improve the business.